Showing papers by "Government of Canada published in 2013"

The Euro Area Sovereign Debt Crisis: Can Contagion Spread from the Periphery to the Core?

Abstract: We examine the determinants of joint default risk of Euro Area countries during 2007-2011. To accomplish this, we recover joint default probabilities from individual CDS contracts. In contrast to earlier theoretical studies, we find that financial linkages are an active contagion transmission channel only in the case of the troubled periphery Euro Area economies. During the current sovereign debt crisis, real economy linkages play a more important role in transmitting shocks from the Euro Area periphery towards its core. Countries that have stronger trade interconnections with troubled economies tend to have a higher expected joint default risk.

Mesoporous carbons supported non-noble metal Fe-NX electrocatalysts for PEM Fuel Cell oxygen reduction reaction

Abstract: Three types of iron–nitrogen-containing non-noble metal catalysts, supported on an ultrasonic spray pyrolysis mesoporous carbon (USPMC), a hollow core mesoporous shell carbon (HCMSC), and a standard carbon (Ketjen Black CJ600, KB), respectively, are synthesized using a wet-impregnation method. The morphologies and structure as well as composition of the synthesized carbon supports and their corresponding supported Fe–NX catalysts (namely Fe–NX/USPMC, Fe–NX/HCMSC, and Fe–NX/KB, respectively) are physically characterized using EDX, SEM, FESEM, and BET analysis, respectively. The catalytic activities of these three electrocatalysts toward oxygen reduction reaction (ORR) are measured using rotating disk electrode technique in O2-saturated 0.5 M H2SO4 solution. The catalyzed ORR exchange current densities are also obtained using the Tafel method based on the measured data. Among these three electrocatalysts, Fe–NX/HCMSC can give the best ORR performance, which is correlated to its higher nitrogen, mesopore, and micropore contents, compared to the other electrocatalysts. It is rationalized that the performance improvement of these electrocatalysts may be achieved as long as an optimal relationship among mesopores, micropores, and even macropores for increasing both ORR kinetics and reactant gases accessibility to the active sites can be found.

Why Do Emerging Markets Liberalize Capital Outflow Controls? Fiscal Versus Net Capital Flow Concerns

Abstract: In this paper, we provide empirical evidence on the factors that motivated emerging economies to change their capital outflow controls in the recent decades. Liberalization of capital outflow controls can allow emerging market economies (EMEs) to reduce net capital inflow (NKI) pressures, but may cost their governments the fiscal revenues that external financial repression generates. Our results indicate that external repression revenues in EMEs declined substantially in the 2000's compared with the 1980's. In line with this decline in external repression revenues and their growth accelerations in 2000's, concerns related to net capital inflows took predominance over fiscal concerns in the decisions to liberalize capital outflow controls. Emerging markets facing high volatility in net capital inflows and higher balance sheet exposures liberalized outflows less. Countries eased outflows more in response to higher net capital inflows, higher appreciation pressures in the exchange market, higher real exchange rate volatility and greater accumulation of reserves.

GPM6: The Global Projection Model with 6 Regions

Abstract: This is the sixth of a series of papers that are being written as part of a project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit to which economists have access for studying both own-country and cross-country linkages. In this paper, we add three more regions and make a number of other changes to a previously estimated small quarterly projection model of the US, euro area, and Japanese economies. The model is estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting properties.

The Effect of Mergers in Search Markets: Large Evidence from the Canadian Mortgage Industry

Abstract: We examine the relationship between concentration and price dispersion using variation induced by a merger in the Canadian mortgage market. Since interest rates are determined through a search and negotiation process, consolidation eliminates a potential negotiation partner, weakening consumers bargaining positions. We combine reduced-form techniques to estimate the mergers distributional impact, with a structural model to measure market power across consumers with different search costs. Our results show that competition benefits only consumers at the bottom and middle of the transaction price distribution. Estimates from a search and negotiation model attribute these differences to the presence of large search frictions.

Price Dispersion in Mortgage Markets

Abstract: Using transaction‐level data on Canadian mortgage contracts, we document an increase in the average discount negotiated off the posted price and in rate dispersion. Our aim is to identify the beneficiaries of discounting and to test whether dispersion is caused by price discrimination. The standard explanation for dispersion in credit markets is risk‐based pricing. Our contracts are guaranteed by government‐backed insurance, so risk cannot be the main factor. We find that lenders set prices that reflect consumer bargaining leverage, not just costs. The presence of dispersion implies a lack of competition, but our results show this to be consumer specific.

A wake-up call: Information contagion and strategic uncertainty

Abstract: A financial crisis in one region is a wake-up call for investors in other regions If the correlation across regional fundamentals is potentially positive but uncertain ex-ante, investors acquire information about this correlation to determine their exposure Financial contagion can occur in the absence of ex-post exposure, due to elevated strategic uncertainty among informed investors This novel wake-up call theory of contagion explains how currency crises, bank runs, and debt crises spread across regions without a common investor base, ex-post correlated fundamentals or interconnectedness Our wake-up call theory generates testable implications for laboratory experiments and new empirical predictions

Sovereign Default and State-Contingent Debt

Abstract: The Latin American debt crises in the 1980s and the Asian crisis in the late 1990s both provided impetus for reforming the framework for restructuring sovereign debt. In the late 1980s, the Brady plan established the importance of substantive debt relief in addressing some crises. A decade later, as the Asian crisis faded, the G10 and major emerging market economies worked together to increase the flexibility of IMF lending and promoted the wider use of collective action clauses in foreign law bonds. More recently, the banking crisis of 2008-09 has led to the implementation of an ambitious financial sector reform agenda to reduce the risk of such a crisis occurring again. But reforms to reduce the incidence and cost of sovereign debt crises, such as those experienced in the euro area, have proceeded more slowly. The international community has a role to play in addressing this gap. In that regard, this paper is intended to stimulate debate on the problems in the current practices for sovereign debt restructuring and puts forward some proposals to improve the functioning of sovereign debt markets. The Bank of Canada and the Bank of England have collaborated on these issues in the past. For example, in 2001, Andy Haldane and Mark Kruger authored a joint paper on how to resolve sovereign debt crises in a more orderly and transparent manner. This current work builds on those ideas by exploring how state-contingent debt could further improve the system. Charlie Bean/John Murray London/Ottawa November 2013

Crisis Management: Analyzing Default Risk and Liquidity Demand during Financial Stress

Abstract: This paper shows that strategies in, and reliance on the payments system as well as special liquidity-supplying tools provided by the central bank are important indicators of distress of individual banks. We conclude that central banks can benefit from using high-frequency data on liquidity demand to obtain a better picture of the financial health of individual participants of the financial system. For the particular case of Canada, using unique features of the payments system and information from the liquidity facilities we find that the willingness-to-pay for liquidity during the financial crisis stayed at low levels throughout the Canadian financial system and that there was no increase in counterparty risk. A key lesson of our analysis is that transactions-level data can be be valuable in determining the appropriate response of regulators and central banks to a financial crisis.

Dynamic Effects of Credit Shocks in a Data-Rich Environment

Abstract: We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. The identified credit shocks, interpreted as unexpected deteriorations of credit market conditions, immediately increase credit spreads, decrease rates on Treasury securities, and cause large and persistent downturns in the activity of many economic sectors. Such shocks are found to have important effects on real activity measures, aggregate prices, leading indicators, and credit spreads. Our identification procedure does not require any timing restrictions between the financial and macroeconomic factors and yields interpretable estimated factors.

Gravity, Scale and Exchange Rates

Abstract: We develop a structural gravity model that introduces scale effects in bilateral trade. Scale effects and incomplete passthrough give two channels through which exchange rates have real effects on trade patterns. Estimates from Canadian provincial trade data identify these effects through their interaction with the US border. We find statistically and quantitatively significant economies of scale in cross-border trade in almost 2/3 of sectors. Real effects of exchange rate changes on trade are found for 12 of 19 goods sectors and none of 9 services sectors.

Productivity growth, trade and FDI nexus: evidence from the Canadian manufacturing sector

Abstract: Using the confined exponential and logistic models of technology diffusion, this paper investigates the roles played by international trade and FDI in explaining productivity growth through both technology transfer and domestic innovation, with the technology transfer also occurring independently. Using panel data on Canadian manufacturing industries, we first find a robust role for the autonomous and international trade embodied technology transfer in explaining TFP growth. Second, international trade and FDI (as well as research and development) all contribute to productivity growth through the rate of innovation. Finally, we find that the exponential and logistic models of technology diffusion may have different implications for the growth dynamics in a technologically lagging country.

Regime Switches in the Risk-Return Trade-Off

Abstract: This paper deals with the estimation of the risk-return trade-off. We use a MIDAS model for the conditional variance and allow for possible switches in the risk-return relation through a Markov-switching specification. We find strong evidence for regime changes in the risk-return relation. This finding is robust to a large range of specifications. In the first regime characterized by low ex-post returns and high volatility, the risk-return relation is reversed, whereas the intuitive positive risk-return trade-off holds in the second regime. The first regime is interpreted as a "flight-to-quality" regime.

Central Counterparties and Strategic Reduction of Systemic Risk

Abstract: This paper studies a dynamic network economy, where risk averse traders trade multi-laterally over the counter but cannot commit to fulfil their short positions. We show that, although the level of trade is below the first-best, bilateral clearing with collateral can provide an allocation superior to those without collateral. However, with use of collateral, the optimal bilateral clearing contract leads to multiple equilibria, one of which is a scenario of systemic default where defaulting one’s trading partner will trigger the victim to default his trading partners, and so on, causing the spread of contagious default. We show that a simple arrangement with central counterparty clearing (CCP) can eliminate the systemic risk of default contagion, and raise the level of trade, but at the cost of higher level of collateral. We show that whether CCP is essential depends on the opportunity cost of collateral, the discount rate, and the traders’ endowment and risk aversion.

Digital Haves and Have-Nots: Internet and Broadband Usage in Canada and the United States

Abstract: This paper builds on the 2012 TPRC paper by the same authors, on broadband adoption and use in Canada and the United States [McConnaughey et al, 2012]. Although very different in their population densities, the two countries have many similarities in terms of geography, demographic patterns, socio-economic factors, and challenges hindering universal broadband Internet adoption. The paper focuses on a comparison and evaluation of broadband adoption and usage results from major national surveys: the Statistics Canada’s Canadian Internet Use Survey (CIUS) and the U.S. Census Bureau’s Current Population Survey (CPS) Computer and Internet Use Supplement. Broadband Internet availability data and subscription rates come from the CRTC’s annual Communications Monitoring Report as well as the NTIA’s National Broadband Map and the FCC’s Internet Use Services (FCC Form 477) reports. The CPS results used in this paper are taken from the Digital Nation series of reports published by the U.S. Department of Commerce.In our analysis, we examine online activities in some detail. We explore policy ramifications in light of our findings regarding online activity patterns, drawing comparisons and contrasts between the United States and Canada where appropriate. Detailed breakouts by socio-demographic factors and geography give information on which to base targeted demand side policies. Such policies can both address adoption and usage gaps and can complement the more common supply side policies used to address availability shortfalls.

Investor Relations and Communications

Abstract: This paper summarizes and discusses results from a survey conducted by the Department of Finance Canada and the Bank of Canada in July 2012 regarding an overview of investor relations (IR) and communications practices of members of the OECD Working Party on Debt Management (WPDM). The survey contained both quantitative and qualitative questions pertaining to IR, grouped into three themes: Definition and Development; Communications Strategy and Relationship Management; and Governance and Sustainability. Survey responses from 26 countries were collected and analyzed under these themes. While the extent of formalization and governance varies, all respondents with outstanding debt indicated that they perform IR activities; comments received suggest a general expansion of IR activities as the function evolves, both as a best practice and for directed, strategic purposes. Responses were collected regarding the most useful IR activities and communication methods conducted by countries, key stakeholder relationships relative to the IR function, and key challenges that include the difficulty in measuring the value of IR, particularly under changing circumstances. Despite the challenges, on-going IR is viewed as an important and effective component of the overall debt management function.

Consumer Bankruptcy and Soft Information

Abstract: This paper analyzes the relationship between consumer bankruptcy patterns and banks' soft-information. Using a major Canadian bank merger as a source of exogenous variation in local banking conditions, we show that local markets affected by the merger exhibit a relative increase in consumer bankruptcy rates following the merger. We analyze different plausible mechanisms by which the merger might have led to higher bankruptcies and provide evidence consistent with the most plausible mechanism being the disruption of consumer-bank relationships. Markets affected by the merger show a decrease in the branch presence and market share of the merging institutions without overall changes in quantity of credit or loan rates.

Reconciling consumption inequality with income inequality

Abstract: The rise in consumption inequality in response to the increase in income inequality over the last three decades in the U.S. is puzzling to expected-utility-based incomplete market models. The two-sided lack of commitment models exhibit too little consumption inequality while the standard incomplete markets models tend to predict too much consumption inequality. We show that a model with two-sided lack of commitment and chance attitudes, as emphasized by prospect theory, can explain the relationship and can avoid the systematic bias of the expected utility models. The chance attitudes, such as optimism and pessimism, imply that the households attribute a higher weight to high and low outcomes compared to their objective probabilities. For realistic values of risk aversion and for chance attitudes found in experimental economics, the incentives for households to share the idiosyncratic risk decrease. The latter effect endogenously amplifies the increase in consumption inequality relative to the expected utility model, thereby improving the fit to the data.

Fiscal Policy Coordination in Monetary Unions

Abstract: The paper studies the design of optimal fiscal rules for members of a monetary union when there are privately observed shocks to countries’ social cost of domestic taxation. First, I show that optimal fiscal rules prescribe policy coordination in the sense of domestic taxation efforts that are positively correlated across member countries. In particular, coordination achieves higher ex-ante joint welfare than any fixed upper bound on domestic deficits. Second, I show that a history of asymmetric domestic taxation efforts leads to tighter policy coordination in the sense of an emergence of retaliatory fiscal policies. As a result, past disagreement leads to an increase in expected domestic deficits across the monetary union.

Comparison of Parametric and Semi-Parametric Binary Response Models

Abstract: A Bayesian semi-parametric estimation of the binary response model using Markov Chain Monte Carlo algorithms is proposed The performances of the parametric and semi-parametric models are presented The mean squared errors, receiver operating characteristic curve, and the marginal effect are used as the model selection criteria Simulated data and Monte Carlo experiments show that unless the binary data is extremely unbalanced the semi-parametric and parametric models perform equally well However, if the data is extremely unbalanced the maximum likelihood estimation does not converge whereas the Bayesian algorithms do An application is also presented

Do High-Frequency Financial Data Help Forecast Oil Prices? The Midas Touch at Work

Abstract: The substantial variation in the real price of oil since 2003 has renewed interest in the question of how to forecast monthly and quarterly oil prices. There also has been increased interest in the link between financial markets and oil markets, including the question of whether financial market information helps forecast the real price of oil in physical markets. An obvious advantage of financial data in forecasting oil prices is their availability in real time on a daily or weekly basis. We investigate whether mixed-frequency models may be used to take advantage of these rich data sets. We show that, among a range of alternative high-frequency predictors, especially changes in U.S. crude oil inventories produce substantial and statistically significant real-time improvements in forecast accuracy. The preferred MIDAS model reduces the MSPE by as much as 16 percent compared with the no-change forecast and has statistically significant directional accuracy as high as 82 percent. This MIDAS forecast also is more accurate than a mixed-frequency real-time VAR forecast, but not systematically more accurate than the corresponding forecast based on monthly inventories. We conclude that typically not much is lost by ignoring high-frequency financial data in forecasting the monthly real price of oil.

Animal Spirits, Heterogeneous Expectations and the Emergence of Booms and Busts

Abstract: We introduce a simple equilibrium model of a market for loans, where households lend to firms based on heterogeneous expectations about their loan default probability. Agents select among heterogeneous expectation rules, based upon their relative performance. A small fraction of pessimistic traders already has a large aggregate effect, leading to a crisis characterized by high contract rates for loans and low output. Our stylized model illustrates how animal spirits and heterogeneous expectations amplify boom and bust cycles and how endogenous coordination on pessimistic expectations amplifies crises and slows down recovery.